What business records should I be keeping as a sole trader?

sole trader business records
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    Self-employment comes with many benefits like flexible working, being your own boss and setting your own business goals. But it also means you need to think about keeping business records and paying tax.

    As a sole trader, you should, by law, be keeping all business records ready to submit your Self-Assessment tax return at the end of the tax year. These records include all business income and expenses, such as bank statements, cash receipts, invoices, and other relevant quotes and delivery notes.

    This blog acts as a helpful guide for sole traders and self-employed people in all areas of record keeping. What information you need to keep, how to store it and why you should start doing it. For more information on keeping records as a sole trader, keep reading or get in touch with Archimedia today.

    Why is it important to keep business records?

    Firstly, keeping business records is important for you. If you ever need to question a transaction on your accounting programme, then you’ll always have the original evidence to review and, if necessary, go back to your supplier or customer to clarify.

    Secondly, HM Revenue and Customs (HMRC) requires you to keep all financial records. So, if you have a VAT inquiry or any other tax inquiry, then HMRC will audit the original records to see how the figures were put together.

    Do sole traders have to keep digital records?

    Sole traders are not yet required to keep records digitally, as MTD (Making Tax Digital) has not yet been launched for sole traders. It’s only a matter of time, though, so getting familiar with Making Tax Digital accounting software will be beneficial for future you.

    There are many benefits to keeping digital records, as well.

    For example, say your supplier sends you a statement that you think is too much. You can simply log into your online accounting software, see which invoices don’t match up with what they’ve sent you, find your original documents and clarify with the supplier.

    It can also help you appear more professional when customers request statements for what they owe you.

    Business records a sole trader should keep

    As a sole trader, it is your responsibility to keep records of all business transactions. This is so you can provide relevant information on your Self-Assessment tax return and have evidence that the transactions made were legitimate.

    Bank statements

    Keeping accurate bank records and year-end bank balances as a sole trader will help you stay compliant with HMRC and prove what business transactions were made during the tax year.

    If you are self-employed and not yet using a separate bank account for your self-employed business, now is a good time to start. Having a bank account solely for your business makes it much easier when tracing transactions and other financial information.

    Business income

    Business income is any payment you receive for the services and goods you provide to customers. Your business income can be recorded through bank slips and sales invoices. Of course, some businesses (retail or e-commerce) won’t always save physical invoices, but it is always a good idea to have an online record of the sales and the type of sales made.

    For example, a hairdressing business may use a till to record the number of sales from each hairdresser. In that case, you can use till rolls or the electronic till data as a form of record-keeping.

    Business expenses

    Business expenses are recorded through bank statements and purchase invoices. They are helpful for categorising your expenses and staying on top of your finances. Bank statements show when an expense was paid, the reference, how much was paid, and proof of the expense transaction.

    Expenses invoices (or purchase invoices) are very important, too, for many reasons:

    1. You may not have purchased the expense through the bank, so an invoice is a good record to show that the transaction actually happened.
    2. You may need to reimburse an employee or subcontractor for an expense they purchased personally.
    3. You may be a VAT-registered sole trader, in which case you need to keep the invoice to know if VAT can be claimed on the expense.
    4. If you make regular purchases from a certain supplier, then invoices can help you keep track of the products you have purchased and what you have paid so far.

    Personal income

    You will also need to keep accurate records of your personal income, which is any income you receive from outside your business, such as investments, property, or an employer. If you’ve taken ‘drawings’ out of your sole trader business or added money in from your own personal funds, then these also need to be recorded – bank statements or a petty cash record is best here.

    Our services are set up to help you with every aspect of record keeping and streamlining your finances – contact us today for some friendly advice.

    What tax records should a sole trader keep?

    As a sole trader, you should keep tax records throughout the accounting period to ensure you submit the correct information to HMRC at the end of the tax year.

    Income tax

    You should keep all the sole trader records for your income tax. The sole trader income will go on your personal tax return, so the business records are sufficient.

    VAT records

    If your sole trader business is VAT-registered, then you need to keep records of the purchases and sales your business makes. In order to claim VAT back on your purchases, you’ll need a “simplified invoice” if it’s between £100-£250 (think ASDA receipt) and a detailed invoice if it’s over £250 (think BT bill).

    Sometimes, if the transaction is under £100, the bank statement alone isn’t enough to determine whether VAT was charged, so keeping all invoices is always best.

    CIS

    To comply with CIS regulations, you’ll need to keep your sales invoices (if you’re a subcontractor) and your subcontractors’ invoices in a certain way. The materials and labour elements need to be split, as well as any VAT and CIS.

    How long should business records be kept?

    To ensure you comply with HMRC regulations, you should keep your business’s financial and accounting records for 7 years, including the current tax year. Keeping your records accurate and up-to-date is important, as inadequate business records can lead to penalties.

    Need help with your sole trader business? Get in touch with Archimedia Accounts

    If you are looking to grow your business and ensure all your business and accounting records are efficiently maintained, then our experienced team will be able to help.

    At Archimedia, we are specialists in all areas of tax and accounting. With over 30 years of professional experience, including growing our own successful business, we are best placed to help you grow yours. We provide a personal service to every one of our clients, helping them save as much tax as legally possible. So, if you want to get ahead of your taxes, save money and grow a successful business, then get in touch with us today.

    Conclusion

    As a sole trader, you should have a vigorous accounting system in place to ensure you are adequately equipped to handle inquiries, access specific financial data, and file your annual tax returns. We recommend using cloud-based accounting software for easy accessibility and to follow the shift of HMRC.

    The records you can expect to keep include bank statements, invoices (sales and expenses), receipts and any other important financial data. Staying up-to-date with your financial records provides you with a clear overview of your business’s financial health.

    Picture of Chris Demetriou

    Chris Demetriou

    Chris is Head of Business Advisory​ at Archimedia Accounts and is a specialist in tax. For more advice book a FREE consultation:

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